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Financing for Distressed Properties (Bank Owned/Foreclosed/Etc.)
I’ve been talking for awhile now about how good of a deal the Bank Owned or Real Estate Owned (REO) properties can be if you’re looking to buy a home in the near future. There are a lot of these properties for sale in Virginia Beach, Chesapeake, Norfolk and the entire Hampton Roads area. These homes include HUD homes, which are foreclosed homes that were financed with an FHA mortgage, VA homes that were previously financed with a VA Mortgage, and foreclosed homes that were financed with any type of conventional home loan.
Depending on how long each home has been sitting vacant and for sale in a slow real estate market, the Sellers (bank/financial institution) may decide to liquidate the home at a loss or well below current market value which is advantageous to the Buyer.
One problem with these properties is that they often need a good bit of work either because the routine maintenance was neglected or the home was trashed when the previous homeowner moved out, or they have just sat vacant for far too long and have developed maintenance issues. For this reason, purchasing these homes is not for the timid. Home buyers need to have a desire for a good deal and be willing to put some work into making the house your home.
The purchase of a distressed home can be a problem, because the bank won't lend the money to buy the house until certain repairs are completed, and the repairs can't be done until the house has been purchased.
Normally, when buying a house that needs repair or modernization, home buyers usually have to follow a complicated and costly process. However, an FHA 203(k) loan offers a solution that helps both borrowers and lenders, insuring a single, long term, fixed or adjustable rate loan that covers both the purchase and rehabilitation costs of a property.
A portion of the loan proceeds is used to pay the seller, or, if a refinance, to pay off the existing mortgage and the remaining funds are placed in an escrow account and released as rehabilitation is completed. The cost of the rehabilitation must be at least $5,000. The 203(k) insured loans save borrowers time and money. They also protect the lender by allowing them to have the loan insured even before the condition and value of the property may offer adequate security. For homes that require less than $5,000 in work, you may want to look into the FHA 203(k) Streamline Loan.
The FHA 203(k) loan is available only through FHA approved lenders and available to first time home buyers wanting to occupy the home, non-profit organizations and government agencies. A minimum down payment of 3.5 percent of total cost (purchase plus repairs) is required. Investors were originally allowed to use this loan however; in 1996 their participation was discontinued by law.
The definition of a first time home buyer is as follows: A single person or an individual and his or her spouse who have not owned a home (as a tenant in common or as a joint tenant by the entirety) during the last three years.
Single family homes are not the only structures that apply to this type of loan. Although cooperatives are not allowed, condominiums are allowed however, certain limitations apply. Also, two through four unit buildings are allowed provided that the purchaser intends to occupy at least one of the units.
The extent of the rehabilitation covered by FHA 203(k) insurance may range from relatively minor (though exceeding $5000 in cost) to virtual reconstruction: a home that has been demolished or will be razed as part of rehabilitation is eligible, for example, provided that the existing foundation system remains in place. Section 203(k) insured loans can finance the rehabilitation of the residential portion of a property that also has non-residential uses; they can also cover the conversion of a property of any size to a one- to four-unit structure. For example say you want to purchase a large six-unit structure and convert it to a four-unit structure.
Here are some of the repairs/improvements authorized with the FHA 203(k) loan:
- structural alterations and reconstruction
- modernization and improvements to the home's function
- elimination of health and safety hazards
- changes that improve appearance and eliminate obsolescence
- reconditioning or replacing plumbing; installing a well and/or septic system
- adding or replacing roofing, gutters, and downspouts
- adding or replacing floors and/or floor treatments
- major landscape work and site improvements
- enhancing accessibility for a disabled person
- making energy conservation improvements
For more in-depth information, details, and rules on the FHA 203(K) loan, or to find an FHA approved lender visit the Department of Housing and Urban Development (HUD) website.
Under the Lender's Microscope
If you're thinking about buying a home in today's market and are not sure what your credit looks like, it's a wise choice to find out before you attempt to get a pre-approval from your lender. Lenders have significantly tightened their requirements in light of the mortgage crisis.
Here are some helpful suggestions from the Spring 2009 issue of USAA magazine to prepare for the lender's scrutiny :
** Check Your Credit Report - The quality of your credit report and your FICO score help determine the terms of a loan. Get your free credit report from AnnualCreditReport.com or call (877) 322-8228. The report is free, but you'll have to pay about eight dollars from each of the three credit bureaus for your FICO score.
** Improve Your Score - Boost your score sooner rather than later by reducing what you owe and never missing a due date. Also, stop applying for credit cards you don't need.
** Monitor Bills - Eliminate credit card debt, or stay well below your limit; pay at least the minimum due and pay on time.
** Gather Records - Lenders want pay stubs, proof of rent or mortgage payments, copies of bills and other documents.
** Save Money - Accumulate a serious down payment, say 10 or 20 percent. Live below your means and save; that's non-negotiable!
For all the information you need to know on Credit Scores and how to manage them Click Here to open a PDF document from MyFICO.com!
** This information was made available by Deborah Bruno of Wells Fargo Home Mortgage. Call Deborah for all your home mortgage solutions at 757-222-1428.
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In This Issue
Financing Distressed Properties
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Under the Lender's Microscope
View all My Listings
Search the Entire MLS
Chesapeake-Riverwalk
3BR, 2.5BA, 2144 SqFt
$314,900
Cul-de-Sac Lot
Shows Great!
Chesapeake-Riverwalk
3BR, 2.5BA, 2446 SqFt
$339,000
Open: Sat., Apr 18th, 12-4
Cul-de-Sac Lot
Nice Upgrades-Come See!
Chesapeake
Woodlake Forest
3BR, 2BA, 1092 SqFt
$220,000
Cul-De-Sac Lot
UNDER CONTRACT!
Chesapeake-Heritage Point
4BR, 2.5BA, 2300 SqFt
$290,000
Family Neighborhood
Must Sell!
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